LESS THAN A YEAR

For countries that possess major reserves of oil and gas it is vital to have the opportunity to reach out to world markets. In this respect, countries which have an outlet to the world's oceans are more fortunate. Although Azerbaijan does indeed possess the resources when it comes to access to world markets, the country is not as fortunate as the Persian Gulf countries or Norway, Britain, Russia, Mexico and Venezuela.

But this matter is not an obstacle on the way to developing Azerbaijan's oil and gas fields. In a short period of time a number of export pipelines able to deliver Azerbaijani oil and gas to world markets - Baku-Novorossiysk, Baku-Supsa, Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum - have been developed and launched. The Projects for the Trans-Anatolia and Trans-Adriatic gas pipelines are currently in the process of development.

It is this diverse network of pipelines which provides Azerbaijan with its energy security and the possibility of choosing the most advantageous and the safest outlet for its energy resources to world markets.

An important step in this regard was the signing of a new contract on the transportation of Azerbaijani oil via the Baku-Novorossiysk pipeline.

"Every country strives to diversify its major oil supply routes. From this point of view the resumption of the transportation of oil via Baku-Novorossiysk meets Azerbaijan's interests," Azerbaijan's Minister of Industry and Energy, Natiq Aliyev, believes.

So, less than a year had passed since the renunciation of the agreement on the transportation of Azerbaijani oil via Baku-Novorossiysk before the sides were able to sign the new contract. Physically, the pipeline had not been idle for a single day.

It was last May that Russian Prime Minister Dmitriy Medvedev signed an instruction on the termination of the contract on the transit of Azerbaijani oil via the Baku-Novorossiysk pipeline. This agreement had been in effect since 1996 and provided for the transportation of up to 5 million tonnes of oil annually at a cost of 15.67 dollars for the transit of one tonne of oil. Azerbaijan, on the other hand, has in recent years maintained transit volumes of 2m tonnes annually. According to statements by officials of Russia's Transneft company, which deals with oil transportation, this tariff did not make the route profitable.

The inter-governmental agreement expired on 14 February. The Russian company proposed its versions of a new contract which, among other things, provided for a scale of tariffs depending on the volumes of oil transportation - from 12 dollars a tonne for pumping volumes of over 5m tonnes annually up to 20-22 dollars for volumes of up to 2m tonnes. These conditions did not suit the State Oil Company of Azerbaijan (SOCAR) and it would seem the sluggish negotiations did not hold out the promise of a breakthrough. And in mid-February SOCAR announced plans to begin exporting its own oil via the Baku-Tbilisi-Ceyhan route. And Transneft started the temporary shutdown of a section of the Baku-Novorossiysk oil pipeline from the Azerbaijani-Russian border to Makhachkala. 

But both parties, clearly having calculated the possible losses and negative factors of switching off the Baku-Novorossiysk route, were soon able to reach a new agreement. R+ was told at SOCAR that according to the conditions of the new oil transportation contract the tariff would be about 16.2 dollars per tonne. "This agreement has been concluded up to the beginning of 2015. Within the framework of the previous inter-governmental agreement we have agreed every year with Transneft the mechanisms and volumes for pumping and have signed a technical agreement. In this instance the new contract repeats the parameters of the technical agreement, with the addition of the tariff," SOCAR pointed out. This year the state-owned oil company plans to pump 1 million tonnes of oil through the northern route. However, despite the new contract, SOCAR does not intend to renounce its earlier plans to pump oil via Baku-Tbilisi-Ceyhan. "We shall also be utilizing this route and we plan to pump about 0.5m tonnes of oil to Ceyhan this year," the company said. Depending on loading conditions and the amount of free space in the BTC, and taking into account the transit of Kazakh and Turkmen oil, SOCAR may increase oil pumping via Baku-Novorossiysk.

That said, the new contract does not provide for maintaining the quality of Azerbaijani oil at Novorossiysk port, where it is mixed with more sulphurous varieties of Russian and Kazakh oil and is sold under the Urals brand, which costs 4-5 dollars a barrel less than Azerbaijani oil in its pure form. SOCAR is aware of this, noting that it would not be appropriate to speak about a quality bank with volumes of 1-2m tonnes annually. But the new contract has given the Azerbaijani side the right to pump the oil of third parties, in particular Kazakhstan, via the Baku-Novorossiysk route, although in normal conditions SOCAR would scarcely be able to take advantage of this opportunity because Kazakhstan itself transports oil on tankers to Makhachkala and beyond along this route to Novorossiysk. But taking into account the beginning of the transit of Kazakh oil to Ceyhan, in conditions of force-majeure the possibility of Baku-Novorossiysk could also be used. Indeed, Kazakhstan's transit volumes via BTC will not be inconsiderable - about 4.5m tonnes for 2014.

"We have signed an agreement whereby 4.5m tonnes of oil will be pumped this year from the Tengiz field to the Baku-Tbilisi-Ceyhan pipeline. In other words, this year will see a leap in the pumping of Kazakh oil," Kazakhstan's ambassador to Azerbaijan, Amangeldy Zhumabayev, said recently.

By any definition, the new agreement is beneficial to SOCAR. The company has virtually succeeded in keeping the tariff at the old, fairly competitive level without being tied to transported oil volumes. And, as indicated earlier, Baku-Novorossiysk plays an important role in ensuring the diversification of energy routes, because the remaining pipelines from Azerbaijan pass through Georgian territory.

Suffice to recall August 2008, when because of the familiar events in Georgia, Baku-Novorossiysk remained the only outlet from Azerbaijan for exporting oil.

It is also to Transneft's advantage to maintain the pipeline in working order. The temporary closure of a section of the pipeline, for which the Russian pipeline monopoly was prepared, and maintaining it in the proper condition requires a certain expenditure which, naturally, can never be justified. Especially as if it is in an unserviceable condition the pipeline will be more liable to wear and tear, which will lead to bigger losses if it is temporary closed down. The option of the reverse use of the pipeline towards Baku, which was discussed last year by the heads of SOCAR and Rosneft, has not been rejected, either. Bearing in mind the increasing demand for petroleum products within the country, and the construction of a new major oil refining complex, the chances of the reverse option will increase.

And in these conditions the only favourable option was to leave the pipeline in working order, drawing to it albeit small volumes of Azerbaijani oil. By concluding a new agreement annually on the transportation of oil, it will be possible to take into account all the nuances of the world and the domestic environment of the market in oil and petroleum products.  

And, more importantly, the Baku-Novorossiysk pipeline will preserve its role in the overall strategy of the diversification of Azerbaijan's energy routes.